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How Arch Coal's Stock Price Fell 32% in 6 Months (ACIIQ) By Jesse Daley | September 28, 2016 — 12:00 PM EDT
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Arch Coal Inc.'s (OTC: ACIIQ) stock price has declined 32% in the last six months as of August 2016. These six months have been quite volatile as Arch Coal's stock fell 50% on two occasions and rose 100% on two occasions. The large shifts are due to Arch Coal being in bankruptcy court where creditors are negotiating among themselves to figure out the company's new ownership structure.
Future Implications
Arch Coal's debt will be converted into a new class of equity. The outcome of bankruptcy proceedings will determine whether equity holders will be given a stake in the new company. Therefore, Arch Coal's stock will continue to have large moves higher or lower as probabilities shift based on the valuation of its assets, negotiations, court filings and rulings from the presiding judge.
Negative Catalysts
Arch Coal filed for bankruptcy on Jan. 11, 2016. Typically, Chapter 11 proceedings take 12 to 18 months before stakeholders agree to a new plan for reorganization. If there is money left over after creditors are paid, this money goes to equity holders. At this point in time, this seems unlikely as the company does not have enough cash to pay back its debts, let alone have money left over for stockholders. Additionally, it continues to operate cash-intensive mines. This is the primary reason behind the downward trend in Arch Coal's stock over the last six months as the odds of recovery diminish.
Arch Coal's 50% drop between February and March was primarily due to statements from secured creditors casting doubt on unsecured creditors' claims to recovery. This led to a steep drop in the value of Arch Coal's unsecured debt from 12 cents on the dollar to 5 cents on the dollar. This negatively impacts Arch Coal's stock as the equity can only have value if unsecured creditors are paid back in full.
There was another 50% drop in Arch Coal's stock price between May and July 2016 as the company reported losses of $206 million in the second quarter. This was disappointing given it had already shut down many mines, reduced its workforce and cut costs. This report made clear that business conditions for the coal industry continue to deteriorate. Additionally, chief executive officer (CEO) John Eaves stated the restructuring process would "extinguish existing common stock when Arch Coal emerges from Chapter 11, and existing equity holders would likely not receive consideration." This report led to Arch Coal's unsecured debt dropping to 1 cent on the dollar, indicating unsecured creditors were also losing hope.
Positive Catalysts
Despite these significant obstacles, Arch Coal's common stock retains some value as it trades at 30 cents as of August 2016. That it has some value shows there is still hope for recovery. The main hope for Arch Coal's stockholders is that business conditions could improve, which would boost the value of the company's assets. This would attract a buyer willing to assume the company's debt.
Some potential catalysts for this include a political change, which would lead to a decrease in environmental regulations; improvements in demand for coal; or increases in natural gas prices. In fact, improvements in these circumstances have been the catalysts for gains in Arch Coal's stock.
Arch Coal's stock gained 100% between March and May 2016 as coal prices found a bottom and natural gas prices rallied 50%. Rising coal prices boost the bottom line for coal miners, while rising natural gas prices encourage utilities to burn more coal. This gain in natural gas prices and coal followed a two-year period where natural gas and coal prices dropped 75% and 35%, respectively. This revived hope that fundamentals may be improving, although this optimism was crushed by Arch Coal's second-quarter filing.
Arch Coal had another 100% gain in early July 2016 as Republican presidential candidate Donald Trump moved ahead of Hillary Clinton in many polls. Like many Republican candidates, Trump has a less favorable view of environmental regulations and stated his intention to bring back coal mining throughout his campaign. However, as Trump's poll numbers dropped following the political conventions, Arch Coal's stock gave up these gains since a Clinton administration is likely to maintain existing environmental regulations on coal extraction and burning.
Read more: How Arch Coal's Stock Price Fell 32% in 6 Months (ACIIQ) | Investopedia https://www.investopedia.com/articles/company-insights/092816/how-arch-coals-stock-price-fell-32-6-months-aciiq.asp#ixzz5SPsw1Jhd
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